Just one really good commercial deal can set most people financially free, but the ugly side of commercial real estate is that also, all it takes is one really bad deal to financially ruin you for life. In this training, you’re going to discover the ugly side of commercial real estate investing, including a real life example of a terrible deal that has the potential to economically flatten the beginner investor who bought the property. You’ll learn priceless lessons on what NOT to do as his case example is broken down into great detail. You will find out that commercial real estate laws do not have the same consumer protection laws that residential real estate has so if you make a mistake, forgiveness may not be an option in commercial real estate. Finally, you’ll be equipped with the wisdom on how to ensure no commercial deal ever flattens you financially. Here is the UGLY side of commercial real estate:
Why This Deal was Bad
Walk through a true real estate deal with me that turned out to be very UGLY. This is the type of deal that could ruin a person financially for generations. Let’s break down what happened.
The Broker
Negative Cash Flow: After discovering that the listing broker had not included several real world expenses on the cash flow spreadsheet, rather than cash flowing a positive $1,800 per month, instead the deal lost about $1,800 per month.
The Loan
Predatory Lending Practices: The loan origination and interest rate costs were astronomically high and certainly well within the bounds of predatory lending.
The Contract
After taking a look at the contract, it seemed to be written with the seller in mind, not the buyer. It was a very tight contract. The contingencies, including the inspection contingency, appraisal contingency, and financing contingency, were all expired. This meant that his $30,000 invested was now non-refundable.
What I Found Out
#1. He had 2 paid off properties that he bought 20-30 years prior and planned to use the money from those to buy this new property.
#2. The buyer and his wife did not make enough money to afford the negative cash flow that would occur each month from this property.
#3. Finally, once he told the broker that the property did not cash flow, the seller proposed a condo conversion. After researching the possibility of a condo conversion, there was no evidence to support this strategy was feasible.
His Conclusions
The buyer came to the conclusion that it was a bad deal, it did not cash flow, the condo conversion was not a possibility, and his life savings were at stake.
After telling the agent he wanted to cancel, the agent called a meeting, threatening to sue for specific performance (force him to take the deal) and take the $30,000. He would then end up owning $100,000 at the end of it all. He caved and moved forth with the deal to avoid being backed into a corner.
Mistakes He Made
#1. Do not sign a legally binding contract or agreement if you do not understand the legal consequences. The broker had every right to sue him for specific performance, but he either did not read it or did not understand the contract. This is a HUGE mistake!
#2. He did not know his numbers. He fell in love with the property, not the numbers. Something we teach our students at Commercial Property Advisors is that every seller is considered guilty until proven innocent. It is imperative to verify, verify, verify, and get a third party to come into agreement with what the numbers should be.
#3. Buyer Beware! Educate yourself on what your rights are and aren’t. If there is some mistake on the seller’s side, you are given 30 days to perform due diligence.
#4. Unrealistic exit strategy. He believed that he could turn this deal around by doing a condo conversion or cash flow. Neither of these strategies could realistically work in his situation.
#5. One wrong deal can ruin you financially. A good deal can give you many financial benefits, but a bad deal can do just the opposite. Consider your financial future when investing in commercial real estate. Do not take it lightly. It is your life savings that is at stake.
How to Avoid the Ugly Side of Commercial Real Estate
Before you sign a purchase contract with a seller and complete your first deal, make sure you have a very well qualified adviser on your side. You need a non-biased adviser who knows exactly what they are doing. Commercial Property Advisors is here to help! We will help you navigate the murky waters of commercial real estate and help you to stay out of the ugly side. Join our Protege Program today to get connected with one of our experienced advisors and start your commercial real estate journey.
This is great!
What this guy did was a complete recipe for disaster. Everyone around him was a predator, from the seller, the broker, the lender. And thanks for this eye-opening video.
Great information
I am a realtor in Florida who is looking to get more involved in commercial re and don’t want to have my clients make costly mistakes when purchasing. You mentioned knowing thy numbers, how can you get the seller to give you the correct numbers so that you can get an actual account? Can you ask the broker to send you a notarized rent rolls or bank statements to prove income and receipt to prove expenses?
Absolutely you can demand official income and expense records. Tax returns can be helpful too.
Check with your attorney in your state to consider an Estoppel Certificate from the lessees. Check that it matches the rent roll the broker provides.
Thank you Peter. I really enjoy learning about different fields and strategies. I sell office and industrial buildings and look forward to your next office building segment. Keep up the amazing work.
Hi Peter this video was amazing helped me learn a lot just from watching this thanks!!
Peter,
I agree with Darren’s comments from above. Real estate brokers have a fiduciary responsibility to protect and disclose. With all the ways on the web to look at and review a broker before getting involved with them. Is one of the wisest choices one can make. That individual can file a complaint with the state. I Most states have the complaint of file for the public to review for 10 years.
Great video! I was wondering if you are accepting new students at this time?
You can apply to my Protégé Program here.
Some people have no idea regarding the different types of risk factors associated with the investment in the commercial property. Commercial property is considered as one of the most profitable ways of investment which assure steady cash flow to the investor but a bad commercial property deal could financially ruin an investor’s life. So, an investor should be very cautious while making any major investment in the commercial property. A proper strategy is the key to make a profitable deal. Besides, the market condition needs to be analyzed prior to the deal.
Great video as always, Peter!
As always, you are so clear , concise and practical. I would love to be your protégé .
I just want to say thank you for sending these helpful videos. I would love to have the opportunity to be educated by you personally Mr. Harris. Im pretty sure there is a long list however, I would like to be added as I begin my journey as a Realtor. I am part of an excellent team here in AZ but we primarily focus residential. Take care and please keep sending the videos.
Thanks for the video.Notes well taken and understood.
I am new to this business and I bought your book, ( ebook). I want to know if you have a school where one can take a short course on real estate? Thank you.
Here is an online video course I put together: Commercial Real Estate Investing for Beginners
I appreciate this one example, but it is not enough. Do you have anymore examples? Please, Please, Please, Pretty, Pretty Please share them. Thank you.
Peter,I have invested in A few commercial property’s. I was a owner/user at the time. Luckily I didn’t make any huge mistakes and made out good at the sell. Now I am serious about some real investing in CRE and want to say thanks for the info. It has been very helpful and it made me take caution in my aprouch to investing.
Peter if a seller back out on a deal could the buyer sue the seller or could their be recourse for the buyer. Thanks
If the contract allows for it, the Buyer could sue for specific performance.
Commercial Real estate brokers have an ethical responsibility to the profession . They also have a responsible duty to clients. I see many deals daily that they leave themselves wide open for huge law suits. It appears the practice has become so common and instead of selling cars or vacuums these guys go out and gather pretend buyers only to scam a seller in to their web of ( I get my commission because I brought a willing and able buyer ) even if the deal does not close. Very sad situation the field has become . It would be great to see the scammers put to justice. I know of some deals that are about to go front page against a huge brokerage. They know it as well. They sit back and laugh at a tem million dollar law suit knowing that corporate has billions. It will be a fun
reality show to watch, how ever these scammers will go down and they have innocent families that will go down as losers as well. there should be a hot line for for deals about to go bad !! A way to go directly to the brokerage house and advise your brokers are about to cost you millions !! For a small fee let’s nip it in the bud.
Hi Peter, Excellent video, but I have one question. Since the broker misrepresented the expenses, isn’t the contract invalid?
No. A Broker’s misrepresentation has nothing to do with Contract enforce-ability.
Hi Peter,
I’m new to your portal and I really love the way you explain every situation in detail and I like to know what you think about a Comercial stip center in south Miami Florida. They’re selling it for 2.2 million 19 units all leased and an annual gross income of 292k. I did some numbers and I think it’s a good deal. What will you do?
Thank you
Ed m.
I am looking for a mentor in commercial real estate can you help me?
HI PETER , VERY WELL SAID, I AM A COMMERCIAL BROKER WITH RE/MAX IN QUEENS. I ENJOY YOU SHOW. THANKS .
Good video, very informative.
Peter,
Need a copy of the Master lease agreement. Owner has accepted my LOI-MLO for mobile park purchase.
Thanks,
Greg
Very good Information Peter, seeking an advisor’s input will definitely make all the difference when you start a new venture.
Hello Peter,
I would think the very first mistake was to trust the broker and not have a real estate attorney look over the contract. He would have immediately had a field day with a red pen with that contract. Like you said he fell in love with the property. Thank you for sharing this situation it reminds us of what can happen when we lose our focus. The numbers tell the real story that is if you work them.
Hi Peter, every time you post a video, I am amazed at how much more I learn about commercial real estate investing. This video really showed what happens when one is incompetent and doesn’t know what he/she is doing. It also shows the need to have qualified mentors/advisers on your team. I am hoping to buy my first commercial real estate property in several more months once I find a partner. I will keep this lesson in mind so we don’t get into a deal that can cost us our life savings and a lawsuit. Thank you.
I really love your passion for real estate and desire to help all CRE investors.
Thank you.
Jhoanna R. Jones
Awesome video. Great run down on what happened. Should of told the guy that he should report the Broker so that that doesn’t happen to anybody else.
Excellent video Peter! This is one of your best. Including repairs, reserves, management, and new property taxes when calculating expenses for NOI is valuable information.
It’s good to not only hear the good side of commercial investing but also the bad/ugly side so that the bad/ugly can be avoided.
Invest and Prosper,
Yusuf
Hi peter, you say this fellow had a bad back up plan. I would say he had no back up plan since the condo conversion only came up after he realized it was a bad deal.
All the best
Yaakov Egert